Market Update

Jan 17, 2017

 

The Bottom Line

Bias:

Long-Term Positive and Short-Term Negative for Stocks.

Positive for Treasury Prices and Other Interest Rate Sensitive Bonds.

 

  • We have seen a deterioration in market internals over the last four weeks. Over the near-term odds favor more stock market weakness.
  • Long-term the stock market still looks strong; therefore, any weakness in stocks that we see in the coming weeks should be viewed as a buying opportunity as long as the lows of early November are not violated.
  • Yields look like they have hit a short-term top which is positive for Treasury prices as well as other interest rate sensitive bonds.

Client Update

Client accounts are fully invested and margin accounts are slightly leveraged.

We are invested in Interest Rate Sensitive Bond Funds, High Yield Bond Funds, Emerging Market Bond Funds, and Floating Rate Bond Funds.

Once stock market internals improve, I will look to reallocate back into equities.


Market Technicals

 

Stock Market Price ActionPositive

The stock market is in a strong uptrend (chart below), however has lost some of its short-term momentum as can be seen in how prices have moved sideways for the past four weeks.

The S&P 500 is above both it’s 50 and 200-day moving averages and both those averages are trending higher. This is characteristic of positive stock market price action.

 

Stock Market Momentum Long-Term Positive and Short-Term Negative

In the lower panel of the chart below is a Force Index, which is a volume-based momentum indicator. We are using a 100-period time frame which is used to confirm longer-term trends.

The index turned positive in early November and is still sitting substantially above the zero line. This suggests that longer-term momentum is positive and any market weakness should be minor unless market internals deteriorate.

 

Short-term market internals don’t look as positive. The recent upsurge in stocks has created a short-term overbought condition and momentum is waning.

In the lower panel of the chart below is the MACD Indicator. Notice each time the MACD has advanced above 2 then fell below it’s moving average it has historically marked a period where stocks have fallen to some degree.

Another momentum indicator that has been flashing a warning sign is RSI.

In the chart below, RSI is in the bottom panel, and you will notice that it hit an overbought level last month which coincided with the S&P 500 leveling off. Also, RSI has formed a negative divergence and when this occurred last year, the market pulled back to some degree.

Stock Market BreadthNegative

Below is a chart of the S&P 500 in the top panel along with five different Summation Indexes below it. Of the five, two are above their moving average and three are below.

Market Sentiment Negative

The strong market advance has sentiment warning that stocks are due for a pullback. Below is a chart of the Put/Call Ratio and it has started to fall from an elevated level. Each time this has happened recently, it has accurately warned of near-term stock market weakness.

Treasury Bonds and Other Interest Rate Sensitive BondsPositive

Below is a chart of the 10-Year Treasury Yield. Yields bottomed July of last year, then advanced strongly topping out December 15, 2016. This advance was strong and pushed yields into short-term overbought levels.

Below the Yield Chart are two momentum indicators. In the first panel below the yield chart is the MACD and it has reversed from an extended level. When this has occurred in the past, yields have retreated to some degree. In the bottom panel is RSI and not only did it reached overbought levels, but it also formed a negative divergence which was a warning that yields were due to fall.

The recent drop in yields has coincided with an advance in Treasury Bond Prices. Below is a chart of TLT (a Treasury Bond ETF). Notice how price bottomed last month and is now advancing. Also, the two momentum indicators below price formed positive divergences which were warning signals that prices were bottoming and due for a bounce.


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If you have any questions, please feel free to contact me.

Craig Image_wires_skin40_level_grey_160pix

Craig Thompson, ChFC

https://assetsolutions.info/

Email: [email protected]

Phone: 619-709-0066

About Asset Solutions

Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.

We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.


Asset Solutions is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

 

 

 

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